Most forex traders tend to spend a lot of time researching into finding an edge with a forex trading system or strategy. While it is essential to find a system that suites ones trading personality, this comes at the cost of ignoring the other important elements in trading which is planning.
By giving undue importance to a trading strategy, a trader often ends up compromising on working within the framework of a trading plan. A forex trading plan is just as essential as a forex trading system as it helps to prepare a trader on the minor yet critical aspects such as position sizing and risk management.
Building a trade plan
Traders might have heard the phrase, “Plan your trade and trade according to your plan”. Although this sounds simple, practically this philosophy is harder to implement if there are no ground rules laid out. So how does one go about building a disciplined trading plan? The following tips should help guide the reader as it lays the basic groundwork for building their trade plan.
1. Balance your technical and fundamental analysis
Most traders end up either paying too much attention to technical analysis, compromising on the fundamentals or vice versa. It is essential to find a balance between the two. While one might argue that one field of analysis trumps the other, the truth is far from it. To put it bluntly, if you want to be successful trading the forex markets, then you need to have a grasp of both the fundamentals and technical aspects of the instrument or asset that you are trading.
Sure, EURUSD might be falling and you might see an opportunity to short the currency based on your trading system. But if you do not know the reason why the Euro is falling against the US Dollar, it can make you vulnerable to impulsive trading decisions.
2. Learn the bigger picture
Perhaps the best way to illustrate this point is to take the example of a person building a house. Would you just start to build a home on a vacant plot of land without considering other aspects such as how deep you need to lay the foundations or get acclimatized to your surroundings?
The same holds true with trading the forex markets as well.
When we say “learn the bigger picture” we are simply referring to gaining an understanding of what’s happening on the longer time frames, such as weekly, monthly or even daily depending on your preferred time frame for trading.
Your trading system might signal a long position, but what if the higher time frame points to a mere bounce or a correction in the major trend? By shutting yourself off from the bigger perspective, the odds of trading against the trend increases remarkably and thus gives rise to potential stop outs or even margin calls.
3. Stick to familiar territory
While you might get tempted to try out your trading system on an exotic currency pair, it is not wise to do so. Sticking to the assets or instruments that you are familiar with gives you a better edge, especially when you take into considering the first point mentioned in this article, which is to balance out between technical and fundamental analysis of the currency pairs of your choice.
Sure, trading the USDMXN might look tempting, but if you do not know what the economic indicators and monetary policies of the respective economies are, your trade positions are likely to be very vulnerable.
In this essence, it is important to focus on just a handful of currency pairs and their respective economies, which when combined with the fundamental and technical view of those currencies, gives you a better chance to manage your risks.
The above three pointers are by no means the be all and end all towards building a trading plan, but in essence points to the most important basic foundations towards building a more sophisticated approach to trading the forex or financial markets. A trading plan not only helps to maximize the potential of your trading strategy, it also helps the trader to be more disciplined in their approach and thus allows traders the advantage of being able to better manage their trades and risk.
By John Benjamin | Analyst at Orbex